Regulators proliferate in Czech Republic amid mixed results

For almost every business sector there is a regulator or at least a more general watchdog keeping an eye on developments. And some of those key business sectors lacking a regulator right now should soon be getting one. But Czech regulators as a whole have had a turbulent ride over the last couple of decades and many have still to convince that they are up there with the best in Europe.

Competition office, photo: Tomáš Adamec

To those who do not believe, like former president and prime minister, Václav Klaus, that the free market can mostly be left to its own devices, there are regulators. These have sprouted up across the board in the Czech Republic over the last 20 years, mostly in sectors where there are monopoly suppliers who could abuse their positions, but also more generally.

And the while the record of the Czech regulators is patchy, there are more on the way and changes in the pipeline for those already on the scene. The Ministry of Transport is now looking at ways of creating a new rail regulator. The water sector is one outstanding area where a regulator has long been talked about but has so far failed to emerge. And there are plans for a fundamental shake up at the energy regulator and perhaps the most potent regulator of them all, the competition office, could get a new head this year. Some of the competences of the telecommunications authority for shaping the next generation high speed broadband market of being clawed back because the Ministry of Industry and Trade is not happy with the office’s ability to do the job.

Let’s start with the competition office. It’s one of the oldest regulators on the Czech scene having started operation in 1991. And for the last five years it has been headed by former Social Democrat member of parliament Petr Rafaj. Rafaj’s five year term is up in July and while he wants to stay on there have been no signals so far from the government that this will be the case.

Several lawyers we approached would not comment on Rafaj’s record for fear of affecting the cases they were dealing with for clients. One Prague-based lawyer, who did not want to be identified, agreed to us reading out some of his comments as long as he remained anonymous : “The office deals with two types of cases: tenders and competition cases. In both cases the office is not performing very well. The situation is in fact quite terrible. In the competition cases, the office is not very active. You can see this when you compare what sort of job it is doing compared with its counterpart in Slovakia. With regard to tenders, the office has a very formalistic approach which means that it takes on a lot of cases where it should not really be involved.

“Compared with other heads of the office, the current chairman Mr. Rafaj is very weak. He is not interested in competition and only cares about public procurement, though he does not understand that very well. There is not a problem with the number of staff but with their training. He has not been able to create a good team.”

OECD criticism

Petr Rafaj, photo: archive of Competition office

In its 2014 report on the Czech Republic, the so-called economic advisor to rich developed countries, the Organisation for Economic Cooperation Development (OECD) produced what amounted to a critical comment on the functioning of the Czech competition office. It pointed out that the office’s resources seemed to be skewed to dealing with dealing with state aid, abuse of dominant position, and public tenders. Few of the 200 staff dealt with cartels.

As regards staffing, it pointed out that many of the 200 workers were fairly young, the average age was 35, and most clearly did not see the office as a long term position. The average stint in posts was five years and hiring of outside experts was complicated.

The report pointed out that only four cartel cases were opened up in the previous four years and most of these were over suspicions that public tenders had been rigged. A leniency programme in place, offering protection to those who blew the whistle on cartels, did not initially have any effect because it could not offer satisfactory incentives for those willing to break ranks and denounce cartels.

In more general competition cases, the OECD report said that the office often adopted a very wide definition of markets under scrutiny meaning that a more lenient view was often taken. In this way state controlled electricity company ČEZ was able to build up its market position although it generated around three quarters of the country’s electricity. The big three players on the mobile phone market were not unduly bothered either although they charged some of the highest fees in Europe.

Deputy chairman of the competition office Michal Petr said it has already put the focus increasingly on cartels when the OECD report was penned, but that the change had still to bear fruit. “I believe that we have concentrated on cartels very much, but the report was issued before this was visible on the statistics. The shift to cartel detection takes some time and we began to fully focus on cartels some three years ago and it was only last year that we started closing most of the new proceedings concerning cartels. So I would respond that we were fully in line with what the OECD has reported and last year we issued more decisions on cartels than at any time in the past.”

He said some of the blame for failing to take on some dominant telephone and energy companies in the past was shared with other regulators as well.

Energy regulator

Alena Vitásková, photo: Filip Jandourek

The Czech energy office has had a turbulent recent history with its outspoken current chairwoman Alena Vitásková frequently clashing with industry bosses as well as the Minister of Industry and Trade Jan Mládek. There are currently plans to curb the powers of the chairwoman by introducing a council which would take over some of the competences. But in the early days of the office the criticisms were rather the opposite, that it was taking a too passive and hands off role and had a far too cosy relationship with the ministry, from which many of the top staff were taken.

The current spokesman for the energy office is Jiří Chvojka said that the situation found by chairwoman Vitásková when she took up office in 2011 was far from satisfactory: “The office definitely was not functioning well because there were a lot of mistakes in licensing processes and in controlling processes and Miss Vitásková made a couple of audits of these activities and totally changed the system how the energy regulatory office worked. It definitively led to the situation that some people had to leave the energy regulatory office and that we had to bring in new experts which took some time.”

Mr. Chvojka put his finger on another problem already obliquely referred to before, that many of those working in the regulatory offices are earning a fraction of the wages of lawyers or industry bosses they are dealing with and that it is therefore difficult to get the right people and keep them. “It would always be difficult to find enough people with enough competence and enough erudition because, of course, the state official is not as well paid as they would be in the private sector. But we can say right now that [in the energy regulator] there is a stabilized situation.”

On the right track?

Photo: Kristýna Maková

And so how about the new rail regulator which is in the pipeline and one of whose main tasks will be to juggle the demands of different passenger and rail cargo companies so that they can have adequate access at the right times and prices to stretches of track which are in heavy demand. Aleš Ondruj is spokesman for the Student Agency group which runs the RegioJet trains on the fiercely competitive Prague-Ostrava route. He says that his company fears that a new regulator, which must be put in pace according to European rules, might complicate access to track and put a brake on competition rather than improve it.

“You can see on the main railway line in the country huge competition on the market which came about without having such a regulatory office. So there is always a question what is going to happen when such an office, or authority, is going to step in into that situation when you already have competition on the market, when you have three or more companies on the market already operating in strong competition on the main rail line. And the question is how will the new authority reflect that situation and what will be the influence on that.”

Rail competition is advancing fairly timidly in the Czech Republic and Social Democrat prime minister Bohuslav Sobotka told rail unions last week that he wanted state passenger rail company Czech Railways to maintain its role as the main player in the sector. So Aleš Ondruj’s concern about the new regulator might not on the wrong tracks.